Can My Contracts Protect My China Business?

Can my contracts protect my China business? The short answer is yes. The longer answer is yes, but it depends. Read on.

During my visit to CIIE this month, I had the chance to engage with a few foreign businesses looking into entering the Chinese market.

Some are ready to enter China because they committed resources to the market and did extensive research before jumping in. Many others did not, which could turn out to be costly on the long run. Many don’t know for example that anyone walking around the expo can take a picture of their brand, go apply for a trademark registration here in China, and thus “technically” own that brand. And many don’t know either that it doesn’t matter whether you registered the brand in your home country or did not, once someone owns “your” brand in China, you will become the infringing party if you enter the Chinese market with that brand. This is a small example of how failing to seek legal support very early on in the process could harm your brand and business in China. This is valid for trademark registrations, patents, distribution contracts, or any other set-up where liabilities are at stake.

The one-page China contract

Ever wondered why contracts in China are shorter than those you come across in the West? Part of the reason is the Particularist nature of the Chinese culture. People and businesses prefer having a flexible approach to unique situations rather than following standardized rules. This approach that focuses on relationship contrasts with the Western approach that is universalist and focuses on rules. In the West, a trustworthy person is someone who honors his word/contract. In China, a trustworthy person is  one who honors changing mutualities. As the relationship develops, more flexibility is expected from each party. That translates into contracts that are shorter, thus leaving room to the parties to accommodate each other as that relationship grows. In China, a response to a situation changes based on what’s happening in the moment and who is involved. I have been doing business in China for years and never had to sue someone nor have I been sued by someone. #touchwood.

Does China actually enforce contracts?

The short answer is yes it does. China ranks 5th globally in enforcing contracts in the World Bank’s Doing Business report. Yes, number 6 globally! This means if you have a well-drafted China-centric contract, it will be enforced by Chinese courts. But what does “well-drafted” mean?

How to make your contract enforceable in China?

  • The contract should be drafted by a Chinese lawyer who understands Chinese laws and regulations. Needless to add that the English language skills of the appointed Chinese lawyer must be impeccable. I can cite several instances where foreign clients’ requirements were misunderstood by the local lawyer, which resulted in material and reputational damages down the road.
  • The contract should be in Chinese language. In cases where the contract is in Chinese and English, the Chinese version supersedes in the Chinese court. The English version is merely a translation of the content of the Chinese version.
  • The contract should call for the application of Chinese law (obviously)
  • The contract should be China-centric. Translating your Japan manufacturing contract into Chinese and getting your partner in China to sign it does not work, although it might be tempting to do so.
  • The contract should indicate that any dispute arising out of or relating to the contract should be settled in a Chinese court, located in the jurisdiction where the other party has most of their assets. For instance, it’s pointless to sue in California a Chinese company that has most of its assets in Anhui, China.

Bottom line, make sure you have proper legal coverage if you plan to enter the Chinese market.

Disclaimer: I am not a lawyer nor am I qualified to dispense legal advice. All the information shared here is based on exchanges I had/have with foreign businesses running into all sort of legal troubles when doing business in China.

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